Answer to Question #229266 in Macroeconomics for NICOLE

Question

Using the aggregate demand and aggregate supply (AD-AS) diagram, explain what will happen to the equilibrium price level and Real GDP when each of the following events occurs:

(i) A technological advancement in agricultural sector.

(ii) The Malaysian government’s economic stimulus package of RM8 billion.

(iii) An appreciation of Ringgit Malaysian (RM).

Answer 1

(i) A technological advancement in the agricultural sector:- A technological advancement in the agricultural sector causes the rightward shift in the aggregate supply curve. It results in a decrease in price level and increases in output.

The above diagram shows that as the aggregate supply curve increases from AS to AS' then the price level falls from P to P' and output rises from Q to Q'.

(ii) The Malaysian government’s economic stimulus package of RM8 billion:- As the government increases its expenditure by introducing a program then the aggregate demand curve shifts rightward. It causes an increase in both price level and output in an economy.

The above diagram shows that as the aggregate demand curve increases from AD to AD' the price level rises from P to P' and output rises from Q to Q'.

(iii) An appreciation of Ringgit Malaysian (RM):- As the value of currency increases then exports falls and import rises such that the net exports fall. It causes a decrease in the aggregate demand curve such that both price level and output fall in an economy.

The above diagram shows that as the aggregate demand curve decreases from AD to AD' then the price level falls from P0 to P1 and output falls from Y0 to Y1.